Tax: Honk Land v. Inland Revenue

Charging a global group management fee against one of the group to create a loss offset between a company and a trust amounted to tax avoidance and justified a fifty per cent tax penalty for taking an abusive tax position the Court of Appeal ruled. 

The Court was told Mr Andrew Tauber, a guiding hand behind the Honk Group of companies, arranged a $1.15 million management fee to be levied removing taxable profits from a trading trust within the Honk Group setting off this amount against tax losses in a related entity: Honk Land Ltd.  Honk Land was about to be sold.  Honk Land’s existing tax losses would no longer be available on a change of ownership.  No money changed hands.  The management fee was recorded as a series of back-dated book entries written up at the end of the trust’s financial year.

The Court of Appeal confirmed lower court rulings that this arrangement amounted to tax avoidance.  There was no evidence of any services in fact being provided in return for the management expense charged.  There was no documentary evidence justifying the size of the fee.  Fees charged were not fixed by any costs incurred but simply by reference to the amount required to achieve a tax offset.  Mr Tauber said it was impossible to separately itemise management services provided to each one of a number of taxable entities within the Group.  Precise allocation of management costs was not possible; commercial reality required a global assessment.  The Court ruled tax law does not allow a global approach.  Any tax deduction for management services requires proof of services provided to each specific tax entity.  Complete precision may not always be possible, said the Court.  But in this instance there was no division of management services at all.  A global sum for management of Honk Group could not be claimed as a deduction by one company alone within the Honk Group.    

Honk Land v. Inland Revenue – Court of Appeal (10.03.17)

17.023

Director: Chtouki v. Ministry of Business

Director addresses on company office records are valid for letters sent banning directors from managing any company even when the address is no longer current.

Yosef Chtouki challenged a Ministry of Business notice banning him from acting in company management for a period of four years starting late November 2012.  This after being subsequently convicted of breaching the notice.  He said he had never received any official notice of a ban.  Previously, Chtouki had been involved with a number of companies which raised Companies Office concerns: Beauty Management Riccarton Ltd, Pink Doll Ltd, Hairstyle Management Eastgate Ltd and Hairstyle Management The Palms Ltd.  He had managed companies using various aliases including: Ricardo Santoro, Shamir Doutros and Paco Mani.

Chtouki, while working under the name Joseph Brooks, received adverse media publicity with allegations patrons using his hair salons suffered scalp and hair injuries.

Justice Whata said there was evidence that Chtouki had been advised by his then lawyer that Companies Office staff were investigating his commercial activities and that a banning order might follow.  Subsequent notice of a four year ban was posted out to the multiple director addresses listed on Companies Office files for Chtouki’s many companies.  Directors are obliged to keep the public register at the Companies Office up to date.  A listed address amounts to a person’s “last known address” for sending official notices until a company is struck off, Justice Whata said.  One letter for one company was returned, undelivered as addressee unknown.  An undelivered letter does not amount to effective notice of any ban.

Chtouki was also convicted of making a false statement on the company register for the address of a shareholder in Bungamogoo Pty Ltd.          

Chtouki v. Ministry of Business – High Court (8.03.17)

17.021

Trust: Erceg v. Erceg

Disappointed beneficiary Ivan Erceg failed in a Supreme Court action demanding access to trust documents from his late brother’s family trusts.  Michael Erceg’s family trusts were wound up in 2010 distributing profits from their sale of Independent Liquor for a rumoured $1.3 billion with Ivan receiving no payout.  Discretionary beneficiaries have only a qualified right of access to trust details, the Supreme Court ruled.

Michael Erceg left a valuable liquor distribution business on his death in 2005 in a helicopter crash.  Ivan received a $95 million inheritance from Michael Erceg’s estate but was himself bankrupted in February 2010 following the collapse of Sensation Yachts, a luxury boat building business based on Auckland’s upper harbour.

Ivan sued trustees Lynne Erceg and Darryl Gregory demanding copies of trust deeds and financial records for two family trusts set up by his late brother.  They refused access, stating that Michael Erceg had made it clear in his lifetime that he did not want Ivan to have any involvement in the trusts.  The trustees expressed concern Ivan was likely to use information about trust distributions to harass beneficiaries paid out.  Ivan Erceg is not a named beneficiary in his brother’s family trusts; he is one of a class of relatives who might receive benefits.

The Supreme Court was asked to rule on the narrow legal issue of a discretionary beneficiary’s right to access trust records.  As a matter of principle, any beneficiary has the right to seek information to ensure a trust is run properly for the benefit of all beneficiaries, it said.  But this right is qualified: it depends on the information sought, the reason disclosure is sought and the status of the beneficiary.  Requests for information by a larger number of beneficiaries will be viewed more favourably than a request by one beneficiary.

Ivan Erceg’s request for disclosure was refused.  Past threats to disclose confidential trust information and potential harassment of other beneficiaries counted against disclosure.  One 2009 email to Lynne Erceg threatened: “when my story has been told, the need to continue life’s journey will no longer be required.  The blood and death that will flow will stain both Darryl [Gregory] and Lynne [Erceg].  The costs will be greater than can be imagined at this time”.

The Supreme Court pointed out that any distribution to Ivan Erceg from the family trusts in 2010 when these trusts were wound up would have been seized by the Official Assignee for the benefit of Ivan Erceg’s creditors – he was bankrupt at the time.   

Erceg v. Erceg – Supreme Court (8.03.16)

17.022